Be Careful What You Wish For

By Mike Hoffman, Esq., CPA

While trust law has been around for hundreds of years and is relatively well settled, the State of Georgia finally entered into the 21^st century and made some significant upgrades to our Trust Code, effective July 1, 2018.

Many of these changes are consistent with what most states across the country are doing with their trust law. Significantly, Georgia changed its Rule Against Perpetuities – the restriction on how long a document can create or govern a trust – from 90 years to 360 years. This is significant because it allows trusts that are set up for multiple generations to run for more than ten generations, as opposed to about 2 1/2 generations.

To put this in perspective, think about how many generations in your own family tree it would take to go back ten or more generations.

Another new provision allows an old trust to be “decanted” into a new one with more desirable provisions, in order to better carry out the grantor/settler’s intent and enhance the power of the trust planning.  The new law also provides a more streamlined method for modifying trusts, not only through a court but also without going through a court (non-judicial modification).

Trusts can be wonderful things. By setting up a separate entity, generally through your Last Will and Testament or a Trust Agreement, you can accomplish many things. Historically, trusts were created in the estate planning arena for tax purposes.  Think of it this way: If dad died and he had a $1 million exemption from federal estate taxes, yet left everything to mom, he would have no taxable estate. His $1 million estate tax exemption would have been wasted.  Instead, if his will created a trust for mom, his estate would force a $1 million taxable estate and allow the full use of his remaining estate tax exemption, i.e. not wasting it. That $1 million trust, plus whatever it grew, would have already dealt with federal estate tax and would be excluded from mom’s estate when she died. Now, consider that the estate tax exemption under Trump’s new tax law is $11,000,000, not a mere $1,000,000!

However, there are many other advantages for creating trusts for surviving spouses and descendants, and some of these include:

1. Opportunity to control who is in charge of the inherited property by designation of desired trustee and successors. In most cases, the beneficiary can also be named the trustee of his or her trust (so “mom controls the checkbook!”) We refer to this situation as a beneficiary controlled trust, or BCT;
2. Protection from judgment creditors and divorce, since the property in trust may be excluded from the ownership and marital estate of the beneficiary;
3. Flexibility to pay trust income to different beneficiaries for tax reasons, as income of a trust is generally taxed based on where it goes.  For instance, if mom doesn’t need all the income from her trust, she might leave some in the trust (and let the trust pay the income taxes), or “sprinkle” it out to children or grandchildren, who are likely in much lower income tax brackets than mom.
4. Preservation of the assets in the family, since the trust can designate who or what the remainder beneficiaries are;
5. Elimination of probate administration, since the assets are not owned by the beneficiary and will not be subjected to probate administration upon the death of the beneficiary;
6. A great number of other more subtle advantages.

As the years go by and stocks and bonds and real estate continue to appreciate in value, the tax and non-tax advantages of these trusts continue to offer significant and growing benefits. We want to allow our clients to be better stewards of their assets on behalf of their descendants.

So, now we can establish trusts that not only run through the generation of the surviving spouse, but up to or exceeding ten future generations of descendants. Hence, BCT’s with “dynasty” provisions; a highly desirable result if we have assets that are worth protecting!

Historically, estate planning attorneys created what I refer to as “19^th century trusts.”  These are trusts created for descendants, and property is distributed from trusts generally under guidelines like: 1/3 at age 25, 1/3 at age 30, and 1/3 at age 35.  These types of trusts, which terminate artificially because of the beneficiary’s particular birthday, ignore the ongoing and significant benefits that we’ve discussed above. Not surprisingly, not every estate planning attorney has the expertise and experience to draft documents that will create trusts for multiple generations and accomplish the desired objectives.

But, here’s the rub. Now that we have a modernized trust law in Georgia, it is our responsibility, and I’m talking primarily to CPA’s, financial planners and attorneys, to look at existing trusts and existing documents to determine what modifications ought to be made.  If you think about it, there are thousands, even tens of thousands, of trusts that have been in existence, or will be created by testamentary disposition in documents, that were drafted before this new law went into effect. Our clients cannot be expected to examine their estate planning documents or those of their parents to determine how these documents can be modified or decanted to achieve more desirable results.

Certainly clients with larger estates (and the term ”larger” is relative) will want to take advantage of the longer rule against perpetuities, i.e. the 360 year rule.  While this may be tricky for existing trusts, it is something that we are dealing with every day: looking at “19^th century trusts” and attempting to incorporate lifetime trusts and dynasty provisions.

We have come across many other changes clients want, including the following:

• Replacement of the outdated 25/30/35 mandatory distribution provisions with discretionary distribution provisions in a dynasty trust,
• Incorporation of limited powers of appointment to retain flexibility for beneficiaries,
• Addition of contingent general power of appointment for income tax/ basis planning,
• Inclusion of a Trust Protector to ensure seamless administration for generations without court involvement despite changes in circumstances or laws,
• Addition of specific powers to decant that may be broader than decanting provisions afforded by state law,
• Incorporation of beneficiary control of trusts at certain ages,
• Provision for proper waivers of the changed notice requirements included in the 2010 trust code changes,
• Updates to spendthrift provisions,
• Narrowing of distribution language to comply with IRS requirements,
• Addition of “sprinkling” power for secondary beneficiaries to receive income at their lower tax brackets,
• Changes to situs language to allow trustees to move trusts from Georgia to other jurisdictions for tax or administrative purposes,
• General updates of trust administration and trust powers provision (like Sub S provisions, determination of principal and income, etc.)

There are many other reasons that will warrant changes or modifications to an old trust to make it more consistent with the grantor’s intent and the current facts and circumstances of the grantor’s family.

That’s a lot of old wills and trust agreements that should be examined to determine what modifications ought to be made!  After all, who wants to be the advisor who gets sued by the children because relatively simple modifications could have been made to protect their inheritance?

We wanted Georgia to adopt these modern trust concepts, flexibilities and attributes for quite awhile.  We finally got some of them, and now it is our responsibility to make sure they are appropriately applied.

For more information regarding trust agreements or any other estate planning concern, please contact us at 404-255-7400 or info@hoffmanestatelaw.com.